Objectives of Firms (CIE IGCSE Economics)

• The objectives of a firm are a reason for their existence or the desired focus of their owners
  • These objectives typically include profit maximisation, growth, survival & social welfare
     

1. Profit Maximisation
 

• Most firms have the rational objective of profit maximisation
• Profit = Total Revenue (TR) - Total Costs (TC)
• To maximise profits, firms can either increase their sales revenue or decrease their costs
  • Firms continuously analyse their costs to see if they can reduce them so that profit can be maximised

2. Growth

• Some firms have the business objective of growth
  
• In subtopic 3.5 we considered the different metrics that firms use to compare their size which include the number of employees, market share, size of profits & market capitalisation
  
• Firms with a growth objective often focus on increasing their sales revenue or market share
  
• Firms will also maximise revenue in order to increase output & benefit from economies of scale
  
• A growing firm is less likely to fail

3. Survival
 

• In the short term, many new firms focus solely on business survival
  
• Generally, as much as 25% of new firms fail in their first year of business
• Once a firm is established, it may then begin to focus on profit maximisation as its new objective

4. Social Welfare
 

• More firms than ever are launching with a social welfare objective
  • These typically include a focus on climate action & addressing poverty or inequality
    
• They still require profit to survive, but will accept less than if they were profit maximising as long as they are meeting their social objective